Tax Effects

When a legislature raises the excise tax rates on alcoholic beverages, the resulting cost to distributors is passed along to consumers in the form of higher prices. As is true for other commodities, the sales of alcoholic beverages tend to fall when prices increase. This is not to say that price is all that matters. For example, the steady decline in sales and consumption of alcohol during the 1980s cannot be explained by increased prices, since the prices of alcoholic beverages remained more or less constant (in real terms) during this period. The downward trend in consumption presumably resulted from the aging of the population and increasing public concern with healthy lifestyles, among other factors. Per capita sales and consumption of alcohol are nevertheless negatively affected by alcohol beverage prices, and if Congress had increased federal excise taxes substantially during the 1980s, sales would have declined still more rapidly than they did.

Although they differ somewhat, a number of published estimates of the price elasticity of demand for beer, wine, and liquor tend to confirm that price is one of the important variables influencing sales. One review of these estimates concluded that the price elasticity for liquor is approximately -1.0; this implies that, other things being equal, a percentage increase in the average price of liquor will result in an equal percentage reduction in the quantity of liquor sold. Beer and wine sales tend to be somewhat less responsive to price, with estimated price elasticities in the neighborhood of -0.5 (Leung & Phelps, 1993). Estimates for other developed countries are quite consistent with these conclusions (Edwards et al., 1994; Cook & Moore, 2000).

These results do not in themselves imply that a general price increase for alcoholic beverages will reduce consumption of ethyl alcohol (ethanol), the intoxicating substance in all these beverages. In the face of higher prices, consumers can switch to higher- proof brands, reduce wastage, and attempt home production of beer or wine. But in practice, research suggests that these substitutions are not large enough to negate the price effect. Ethanol consumption does tend to fall in response to a general increase in the price of alcoholic beverages.

Given the fact that higher alcohol excise taxes increase prices and reduce ethanol consumption, there remains the vital question of whether alcohol taxes are effective instruments in preventing alcohol-related harms. Of public concern are both the harms associated with the acute effects of inebriation—injuries stemming from accidents and violent crime—and the harms resulting from chronic heavy drinking, most notably the long-term deterioration in health and productivity.

There is considerable evidence that the incidence of both inebriation and chronic heavy drinking, and the associated harms, are sensitive to the prices of alcoholic beverages. For the acute effects, Cook (1981) studied 39 instances in which states increased their liquor tax between 1960 and 1975, finding strong evidence that traffic fatalities in those states fell as a result. This result was confirmed for the beer excise tax by Ruhm (1996) and Saffer & Grossman (1987), both using panel data on state traffic fatality rates. Cook & Moore (1993), also using panel data on states, found a close link between per capita ethanol consumption and violent crime rates, and direct evidence that an increase in the beer tax helped suppress rape and robbery. And, Chesson et al. (2000) use a similar method to demonstrate that the incidence of sexually transmitted disease is inversely related to the beer tax. This literature is not without dissenters (see Dee, 1999), but the bulk of the published research results provide support for the conclusion that alcohol excises influence the incidence of inebriation and the costly consequences thereof.

There is also evidence of a link between alcohol prices and the prevalence of chronic heavy drinking. Cook & Tauchen (1982) demonstrated that changes in state liquor taxes had a statistically discernible effect on the mortality rate from cirrhosis of the liver. Since a large percentage of liver cirrhosis deaths result from many years of heavy drinking, it appears that chronic heavy drinkers are quite responsive to the price of alcohol. This conclusion is supported by evidence from clinical experiments and other sources (Vuchinich & Tucker,

Thus, there is indeed evidence that alcohol taxes are an effective instrument for preventing alcohol-related harms. The claim that alcohol taxes promote the public health is increasingly important in the public debate over raising federal and state alcohol taxes.